Corporate finance models, such as dividends, loans, and current assets, provide businesses with a repeatable process to calculate budget, project pricing, and capital structure information. Spreadsheets and computer programs can help complete these tasks quickly. These models also allow companies to evaluate potential projects and determine the most profitable ones. The capital structure model helps determine the optimal mix of external funds for financing projects.
Corporate finance models are formulas or processes that a business goes through to measure various financial parts. Common models include dividends, loans, or current assets, among others. A model provides a company with a repeatable process by which to calculate budget, project pricing, and capital structure information. Corporate finance models also provide measurements for sensitivity and scenario planning. Using spreadsheets or computer programs can help businesses complete these tasks quickly.
A spreadsheet requires data entry for corporate finance models to provide actionable data. For example, a company may need to evaluate multiple projects. Entering the data associated with each into a spreadsheet allows internal spreadsheet formulas to calculate an expected output. The output provides specific data that managers use to evaluate each potential project. Computer programs work similarly, except they might have more detailed output for analysis.
Dividend corporate finance models allow a company to determine the amount of dividends to be paid from earnings. Dividends are often small payments that a company makes to ordinary shareholders. This financial model represents dividends as part of the cost associated with equity financing. Companies need to understand this figure as it is a cost that does not necessarily bring value. The financial model often calculates the total dividends paid, how to pay them, and the frequency of payments made to shareholders.
Project valuation corporate finance templates provide specific information for selecting value-added projects. These models often compare the costs required to start the project with the potential financial returns. The two compared together can provide a business with profitability for each project. Companies can then select the most profitable project, resulting in higher earnings and greater wealth for the company. Each model usually requires the same information for model inputs.
Corporate finance models of the capital structure are secondary and often work in tandem with project valuation models. These models compare the cost of each possible project and create an analytical framework for financing each, primarily through debt or equity financing. For example, a company in need of external funds often looks to banks for loans, bonds issued to investors, or securities sold to investors who will finance the project. The capital structure model allows a company to determine what mix is needed to maximize external funds used for projects.
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